1. Annual Meeting of the Host Country Committee on Carbon Finance Washington D.C. February 15-16, 2005 www.CarbonFinance.org The World Bank Carbon Funds: Buyers Perspective

2. What buyers want… Purchase CERs preferably valid under EU ETS  no sinks, limitation on hydro No post 2012 vintage of CERs Typically fixed price contracts Payment on delivery of CERs Limited upfront payments usually on a case-by-case basis for most public sector/ multilateral funds Currency: mostly in $ till now, shifting to € Low counterparty (seller) risk –Sound equity investors in the project –Lending by reputable commercial banks –Solid off-take agreements for the underlying product, e.g. power purchase agreement Preference for projects close to financial closure

3. What buyers want (2)… Penalty for under-delivery Most carbon funds (all World Bank funds, KfW fund, Japan Carbon Fund) have no penalty Private sector buyers and brokers pay premium for delivery guarantee Over-collateralization to manage under-delivery risk World Bank carbon funds < 80% of the expected ERs; KfW fund < 50%, etc. Over-collateralization and Unilateral CDM The ability of host country entities to hold CERs in the CDM Registry account of the host country and sell subsequent to initial issuance Inability to do this prohibits Project sponsors from profiting from price increase in the future Private sector in the host country to enter in to brokering Private sector in host country from intermediating and speculating

4. What buyers want (3)… Most carbon funds look for country and technology diversification for risk management –Most buyers have regional preferences Size of transactions Minimum in CDCF about 30,000 TCO2e/year Other funds not less than $3 million of ER purchase Over 100,000TCO2e/year desirable Maximum of about $20 million Low country risk KP ratification status, DNA, CDM approval process Host country approval of a project

5. Key Lessons … Enabling policy environment helps –CDM strategy development is only a first step. Learning by doing (i.e. projects) is the way forward. –Successful CDM projects require a minimum national framework (legal & institutional). Key prerequisites for successful projects: –Project makes basic business sense –Project sponsor / owner commitment –Project reasonably well prepared (feasibility study, underlying finance) –Host country commitment

6. Local Regulatory and Business Environment… CDM/ JI is a competitive market To attract investments in CDM /JI countries, private sector more likely to invest if host country has: –Clear and consistent approach to sustainable development –Clear procedures for project approval (or refusal!) with specific timelines –Single window approach: DNA to assist project proponents in complying with all applicable laws, including those regarding environmental impact assessment Above all, approving a project under the CDM/JI should be transparent and predictable and within clearly stipulated time-frame

7. What works and what doesn’t… Local (Financial) Intermediaries help to –Identify project opportunities at lower cost –Get equity and debt financing –More effectively design and/or evaluate projects –Reduce transaction costs Insufficient project preparation doesn’t help... –Underlying projects must be well prepared (feasibility study, risk assessment, financing). –Committed project equity partners –The project must be viable business proposition. –The sector must be competitive if a project is to be viable.

8. In conclusion… Things that help: –Enabling policy and environment (including a effective DNA and simple approval procedures) –Experienced and committed project sponsors –Mature project idea prepared competently –Domestic credit market liquidity and ability to take informed risks –Local financial institution as intermediaries Things that don’t help –Projects at very early stage of development –Projects that don’t make business sense –Projects that are inconsistent with Sector development goals Environmental, social and other policies